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Can Activist Investors Save Bed Bath & Beyond?

A trio of activist investors wants to clear out the retailer’s entire board.

Shares of Bed Bath & Beyond(NASDAQ:BBBY) surged 22% on March 26 after three major activist investors -- Legion Partners Asset Management, Macellum Advisors, and Ancora Advisors -- moved to replace the struggling retailer's entire 12-person board with 16 of their own nominees.

The three firms, which own a combined 5% stake in the retailer, believe it has the potential to boost its annual EPS over $5 within the next few years. That's a tall order -- Bed Bath & Beyond reported an adjusted EPS of $3.12 in fiscal 2017, and analysts expect that figure to decline 22% annually over the next five years.

Image source: Getty Images.

The activist investors stated that they will share a detailed turnaround plan in the coming weeks and months. Bed Bath & Beyond responded with a press release, stating that it "regularly engages" with its shareholders and "welcomes constructive input focused on enhancing value." It stated that it previously engaged in discussions with Legion and Macellum, but that Ancora never reached out to the company.

Bed Bath & Beyond says that it asked Legion and Macellum for ideas to improve its business, but that the firms didn't provide any suggestions and "chose to publicly attack" the company. It claims that it engaged the firms "in good faith," but that it seems like they "were merely seeking information to support their attack."

An activist move against Bed Bath & Beyond isn't surprising, since it lost three-quarters of its value over the past five years due to competition from Amazon(NASDAQ:AMZN), Walmart (NYSE:WMT), IKEA, and other large retailers. But can this activist move possibly succeed?

It acquired many of these smaller banners to boost its revenue over the past two decades, but those purchases over-extended its brick-and-mortar footprint and simply made it a bigger target for Amazon. Bed Bath & Beyond's stores, which have an average size of about 45,000 square feet, also generate significantly less sales per square foot than Williams-Sonoma's (NYSE:WSM) namesake, Pottery Barn, and West Elm stores.

Image source: Getty Images.

Bed Bath & Beyond seems to be losing upscale shoppers to rivals like Williams-Sonoma, and lower-end shoppers to Amazon, Walmart, IKEA, and other superstores. Walmart's recent introduction of private-label furniture could exacerbate the pain. A look at Bed Bath & Beyond's comps growth and margins over the past year reveal how dire the situation is.

Metric

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Comps growth

(0.6%)

(0.6%)

(0.6%)

(1.8%)

Gross margin

35.9%

35%

33.7%

33.1%

Operating margin

9.1%

2.9%

2.7%

1.6%

Source: Bed Bath & Beyond quarterly reports.

Bed Bath & Beyond is using markdowns to drive sales, yet its comps growth remains negative. Its core turnaround strategy, a subscription program called Beyond+, is also a loss-leading strategy. It offers customers free shipping (with no minimum purchase) and 20% discounts on all their orders for just $29 per year.

The expansion of Beyond+, in-store markdowns, and aggressive coupon offers are crushing Bed Bath & Beyond's margins without boosting its comps. This vicious cycle should continue for the foreseeable future, but the company believes that these sacrifices will pay off and lead to positive earnings growth again by 2020. But that could be wishful thinking, since the numbers indicate that it's still losing ground to Amazon, Walmart, and other rivals.

The activist goal also sounds unrealistic

Bed Bath & Beyond is clearly struggling, but the trio of activist investors hasn't presented any concrete ideas beyond booting the board and hitting a lofty EPS target of $5.

The obvious way to boost Bed Bath & Beyond's earnings would be to divest its non-core brands, aggressively close stores, monetize its real estate, and reduce its Beyond+ benefits, but that could lead it down the same slippery slope that wrecked Sears Holdings. For now, investors should ignore all the noise about Bed Bath & Beyond and focus on more promising retail stocks instead.

Author

Leo is a Tech and Consumer Goods Specialist who has covered the crossroads of Wall Street and Silicon Valley since 2012. His wheelhouse includes cloud, IoT, analytics, telecom, and gaming related businesses. Follow him on Twitter for more updates!